Energy Risk reaction: Impact of Middle East conflict on hedging and longer term risk

Since the effective closure of the Strait of Hormuz on February 28, and the surge in European oil and gas prices, there has been a scramble from corporates to readjust hedges and cover exposures, says Rob McLeod, partner and head of global risk solutions at commodity trading firm Hartree Partners.

In this video, he talks about the increase in hedging activity coming particularly from airlines, refineries, industrials and producers as they clamber to cover increased exposures and basis risk. Meanwhile, Riccardo Rossi, head of Southern Europe origination at Centrica Energy, talks about an increase in opportunistic trading on the sell-side from renewables firms in the face of higher gas and power prices, especially in countries like Spain where power prices have been unattractive for wind and solar producers for some time, with growing instances of negative prices.

With higher prices and volatility pushing up margin charges on contracts such as Dutch TTF futures, there’s been an increase in bilateral trading, but not to the extent seen in the 2022 energy crisis, says McLeod. 

Rossi believes lessons have been learnt since the 2008 financial crisis about balancing credit and counterparty risk with market risk and liquidity risk. In terms of lessons learnt since Russia’s invasion of Ukraine, McLeod is less optimistic, saying that while Europe may have lowered its reliance on Russian pipeline gas, it is now more reliant on liquefied natural gas, so exposure to Russia has been swapped for, for example, exposure to US Gulf Coast hurricanes. 

While in the longer-term the crisis could spur increased interest in renewables development, for now, all eyes will be on the Strait of Hormuz waiting to see vessels moving once again.   

Even if that resumes very soon, this conflict has changed the nature of risk for oil and gas firms for years to come, says McLeod. For decades, the closure of the Strait of Hormuz has been one of the biggest threats facing oil and gas markets, and one that many people thought Iran would never carry out. Never again will this feel like an idle threat, but rather a very real risk to global energy markets and the world’s energy security. 

Key discussion points

1.24  How have energy-exposed firms reacted so far to the conflict and did president Trump’s announcement that the end of the war is “very close” calm things?

3.50 In terms of hedging, what have companies been approaching you for since the start of the conflict? 

5.08 Has there been any impact yet in terms of origination?

7.20 Is there a movement towards more OTC trading?

09.41 What lessons have been learnt since 2022, and are firms in a better position now?

13.43 If firms decide they want more of their hedges OTC, how does that typically work?

14.55 In addition to airlines and refineries, are other corporates also adjusting hedges? 

16.36 What does this crisis do for the long-term outlook for renewables? 

21.16 What’s the next big thing to look out for in terms of this conflict?